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What you need to know about secured credit cards

Mediafeed logo Mediafeed 4/15/2019 Shannon McNay Insler
hand holding credit card giving to another hand© PeopleImages/istockphoto hand holding credit card giving to another hand

Credit can feel tricky at times. It takes credit to get credit, or so it seems when someone is new to credit or working to repair past credit issues. However, there are financial products designed to solve this problem, and using them correctly can lead to other credit opportunities. One such product is secured credit cards. Here’s what you need to know about them.

What are secured credit cards?

Credit products can come in one of two forms: secured and unsecured. Secured credit products, such as an auto loan, mortgage, or home equity line of credit, are tied to collateral that can be seized if the accounts go delinquent. That’s why getting behind on a mortgage, for example, can lead to the borrower losing their home.

Unsecured credit products, such as credit cards and student loans, don’t have any collateral tied to them. If they go delinquent, there’s no property for the lender to recoup — and thus it can sometimes be harder to be approved for these products.

Secured credit cards were created to open the door to credit for consumers who aren’t able to be approved for standard, unsecured credit cards. The collateral put up for secured credit cards is a security deposit, typically somewhere between $49-$300.

Although some secured credit cards’ credit limits are the same as the amount of money put down, that money can’t be used by the consumer to pay the card. This is similar to the way apartments work — renters often have to put down a security deposit that doesn’t go toward their rent, and that they won’t get back until they move out.

Can secured credit cards help you build credit?

Secured credit cards typically have lower credit limits than unsecured credit cards, and they sometimes require an annual fee on top of the security deposit. When compared side-by-side, regular credit cards might seem to be a better product. But secured credit cards can be a great tool for consumers who aren’t able to be approved for a regular credit card.

The activity on secured cards is typically reported to the credit reporting agencies, so proper usage can lead to building good credit. All you have to do is pay the full amount due on time every month and keep your balances low (ideally no more than 30 percent of the credit limit).

Keep in mind that you don’t have to carry a balance on the card from month to month to build credit. This is a common credit myth, but the truth is that you could use your card and pay it in full every month and build credit that way. There’s no need to go into debt to build credit.

This article originally appeared on UpturnCredit.com and was syndicated by MediaFeed.org.

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